1 Why Ground Lease REITs are Building In Popularity

Roberto Leibius edited this page 2025-06-14 15:46:19 +08:00

Table of Contents

• apartments.comAs more residential or commercial property owners in need of liquidity use ground rents to open capital, investor could gain the benefits.-.-.-.-.

apartments.com
As more residential or commercial property owners in need of liquidity use ground rents to open capital, investor could gain the benefits.

-. -. -. -.

• Newsletter register Newsletter. -
  
  When you acquire through links on our website, we may earn an affiliate commission. Here's how it works.
  
  Numerous publicly traded realty trusts (REITs) have actually faced challenges in the past year, with returns largely routing stock market indexes. But REITs that are focused on ground leases - owning the land without owning the buildings that rest on it - have actually been an exception.
  
  Splitting the ownership of business land from the buildings that rest on it isn't an originality. In some methods, it's the very same financial structure that medieval royalty utilized with its topics. But the democratization of ground leases and their growing appeal is reflective of other sort of securitization across the economy - producing narrower and more concentrated return qualities to fit the requirements of various classes of financiers.
  
  And with industrial office realty, in specific, in a prominent state of post-lockdown turmoil, the ability to create a de-risked genuine estate possession has been warmly welcomed by financiers.
  
  Subscribe to Kiplinger's Personal Finance
  
  Be a smarter, much better educated investor.
  
  Sign up for Kiplinger's Free E-Newsletters
  
  Profit and succeed with the finest of specialist recommendations on investing, taxes, retirement, individual financing and more - straight to your email.
  
  Profit and succeed with the very best of specialist suggestions - straight to your email.
  
  At present, Safehold (SAFE) is the sole publicly traded ground lease REIT pure play. It will likely be one of numerous on the marketplace in the coming years, triggering other more conventional REITs to diversify their holdings with land leases.
  
  We have actually currently seen this with a mega-deal including Real estate Income and Wynn Resorts. In a transaction valued at $1.7 billion, Wynn Resorts sealed a sale/leaseback arrangement with Real estate Income, a standard REIT, for its Encore Boston Harbor advancement, a hotel, casino and theater job six miles south of Boston.
  
  Unlocking capital when in need of liquidity
  
  Residential or commercial property owners are utilizing ground leases to open capital in locations where liquidity is lacking. With local banking tightening up loaning - even with the specter of lower interest rates - we are now seeing land lease inquiries shoot up. In my own land lease specialty practice, we are fielding more questions from owners and developers in all property sectors.
  
  One needs to just take a look at numbers touted by Safehold. Tim Doherty, Safehold's head of investments, stated in a press release that the business has broadened land lease deals from 12 in 2017 to 130 in 2022, with the value of the portfolio at more than $6 billion. He attributed the development to a new level of sophistication in the land lease market, adopting methods such as predictability of lease payments, a relocation that leads to more effective rates. Over the last three months of 2023, Safehold stock was up nearly 40%.
  
  Growing popularity of ground leases has actually not gone undetected. Three years back, Dallas-based Montgomery Street Partners began a $1 billion REIT targeted on financial investments in the country's top 50 markets. High interest from institutional investors triggered Montgomery Street to broaden the pool to $1.5 billion in 2022.
  
  Murray McCabe, a handling partner of Montgomery Street Partners, stated in a press release, "The strong demand we have actually seen for GLR's (ground lease REIT) follow-on equity offering validates our technique and confirms that ground leases have actually evolved to end up being an acceptable and traditional financing tool."
  
  Clearly, ground lease financial investment funds are one of the emerging trends in property. Ares Management and real estate personal equity firm The Regis Group formed Haven Capital in 2020 to capture growing land lease demand to, in their words, offer "a more efficient type of financing" that helps unlock possession worth.
  
  These current advancements, together with general financing trends within the property industry, develop a pattern that's tough to disregard: Land lease activity, which has actually grown to a more than $18 billion market in 2022, will only see more offers announced over the next ten years. By one quote, the marketplace could be near $2.5 trillion in the United States alone, supplying a substantial runway for growth.
  
  How does a land lease work?
  
  Long a staple of family offices searching for a constant income and predictable stream from long-held vacant parcels in preferable areas, the land lease has ended up being commonly embraced because the lorry provides a win-win situation for both the structure owner and the landowner.
  
  How does a land lease operate? Typically spanning a regard to 50 to 99 years with renewal choices, a land lease REIT or sponsor obtains the land from the building owner. This arrangement enables the designer to launch important capital, directing it toward locations with higher return potential. Simultaneously, the structure owner keeps complete control of the asset while divesting the land underneath it, which, though beneficial in the development process, provides little return to the overall project. The lease is customized to fit the task.
  
  The Boston Harbor Development serves as an illustration of the long-standing use of land leases in the hospitality market. Additionally, this method has discovered appeal in retail, health and physical fitness facilities and fast-food outlets. Now, various industries are acknowledging the value of this idea. Ground rent payments include fixed annual lease increases.
  
  " Proof of concept continues to spread," Safehold's Doherty stated.
  
  As the benefits to a project's capital stack become readily obvious, ground leases will get broader acceptance and be regularly employed as a crucial element in the genuine estate industry. Predictions recommend that ground leases will become mainstream within the next 5 to 10 years, offering a spectrum of financial investment chances for astute gamers.
  
  Related Content
  
  Bright Spots Amid Commercial Property Struggles.
  REITs Unveiled: A Comprehensive Guide for Investors.
  How to Find the Best REIT Stocks.
  Publicly Traded REITs vs. Non-Traded REITs: What's the Difference?
  Real Estate Investing: How You Can Profit Now.
  This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can examine advisor records with the SEC or with FINRA.
  
  Get Kiplinger Today newsletter - free
  
  Profit and succeed with the very best of Kiplinger's advice on investing, taxes, retirement, individual finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
  
  Jim Small is the Founder/CEO of Sante Real Estate Investments, an impact-based real estate business. For over 10 years, he has partnered with ultra-high-net-worth individuals and household workplaces to obtain and manage thousands of multifamily possessions across the U.S. and Europe, generating constant returns and positive social effect.
  
  Four things you can do today to up your financial readiness SPONSORED Don't get captured financially flat-footed.
  
  To Lose Health Insurance Unless Congress Acts The Kiplinger Tax Letter If current guidelines for the health premium tax credit (PTC), a popular Obamacare aid, aren't extended, 3.7 million people could lose their health insurance coverage.
  
  Keep an eye out for Annuity Surrender Charges: How to Avoid Them Pulling cash out of an annuity early can be a costly proposition. Here's how surrender charges work and one prospective way around them - an annuity "ladder."
  
  The Snake Bite Effect: How Fear Can Cost Investors Dearly Does market volatility make you seem like running terrified? That might be a costly error. Here's why ... and what to do rather.
  
  I'm a Wealth Manager: This Is How to Reduce One of the Biggest Risks to Your Retirement If the stock exchange dips when you retire, your portfolio may not have time to recuperate. But having a structured income prepare for your retirement years can assist.
  
  Ditch the Fear: A Guide to Embracing Retirement Preparedness Don't be terrified about running out of money, be prepared. This financial expert describes how you can help take control of three crucial retirement risk factors with a little preparation.
  
  Jet Set on a Budget: Expert Advice for Summer Travel These cost-saving techniques, supplied by a monetary advisor, are necessary for taking pleasure in summer season travel without monetary tension or debt.
  
  Four Innovations That Reinvented Retirement as We Know It and Why AI Is Next A financial professional explores the developments that have reshaped our lives for many years - and what the next transformation, AI, could mean for your tradition.
  
  What Will They Remember About You? It's Not Almost Your Money Once you retire is the prime-time television to guarantee you leave a significant tradition, personally and financially. This financial coordinator suggests five steps to develop a bridge in between who you are and how you'll be kept in mind.
  
  How One Widow Nearly Missed Out on $213,000 in Social Security Losing your partner frequently suggests losing 30% to 50% of your home income. This financial consultant emphasizes that planning ahead and comprehending the rules surrounding survivor advantages can help.